Simplicity and Nudges Can Help Employees Become Habitual Savers

The Aegon Retirement Readiness
Index (ARRI) measures retirement preparedness on a scale from 1 to 10
with scores of 8 and higher considered to be high retirement readiness,
scores of 6 to 7.9 as medium, and less than 6 as low.

In the nine
original countries where Aegon has been measuring retirement readiness
since 2012, the ARRI increased from a score of 5.2 to 5.5 in 2016. This
increase has been largely driven by positive movements in people’s
feelings about planning and saving, yet it should be noted that this
increase has been offset by a decline in people’s feelings of personal
responsibility for providing sufficient income in retirement.

Countries
such as the United Kingdom and the United States have made the greatest
progress in retirement readiness since 2012. The presence of
well-developed third pillar pensions, in the shape of workplace defined
contribution plans such as 401(k) plans in the United States, means that
people have greater personal ownership over their retirement plans.

New
research from Transamerica Center for Retirement Studies (TCRS) in
collaboration with Aegon Center for Longevity and Retirement (ACLR)
titled “A Retirement Wake-Up Call: The Aegon Retirement Readiness Survey
2016,” illustrates the importance of habitual saving and opportunities
that can nudge or inspire non-savers to start saving. Thirty-eight
percent of workers describe themselves as habitual savers (those who say
they are always saving for retirement)—54% of U.S. respondents describe
themselves as habitual savers. Habitual savers are seven times more
likely to achieve a high ARRI score than the non-savers (37% compared to
5%).

NEXT: Offering ‘nudges’ to save, and making it easy

The reasons people start saving for
retirement fall into two broad categories: "life stage" (47%) and
"employment-related" (39%), the study finds. For example, 32% reported
they started to save because they turned a certain age, and 16% said it
was because they started a family. Sixteen percent said they started
saving because their employer started contributing to their retirement
plan, and 14% said they were automatically enrolled in their employer’s
retirement plan. Nine percent reported they started saving when they got
a pay raise.

The research report suggests this information shows
an opportunity for employers to ‘nudge’ people into saving for
retirement. For example, milestone birthdays could be a good opportunity
to share with workers the need to save for retirement. Some people seek
financial advice when taking out or re-mortgaging their home, which is a
potential opportunity for advisers to introduce other savings options
such as retirement planning products. Major lifestyle changes such as
having children may encourage people to consider their long-term
finances, and present another possible opportunity to engage them in
discussions about retirement.

In addition, the report says,
convenience and making it easy to save should be key features of any
sustainable retirement system in which people are expected to play a
role in financing their old age.

Around two-thirds of workers
globally (65%) find the idea of automatic, default arrangements that
enroll them into a retirement savings plan based on a contribution level
of 6% of annual salary to be very or somewhat appealing. In the U.S.,
75% of workers find the idea appealing.

Even when the survey
inquired about higher contributions at 8% of salary, it still found
broad support, with 61% of workers globally finding it appealing. In the
U.S., 72% did.

NEXT: The need for retirement and financial education

Currently, many workers are neglecting to make any kind of financial
plan for retirement. Workers with a retirement strategy are more
realistic in preparing for retirement and achieve a higher ARRI score
than those without a strategy, yet 38% globally do not have a retirement
plan. Among vulnerable groups, the proportion of those without a plan
increases to 42% among women and 49% of those on low incomes.

Financial
backup plans that help people deal with the unexpected are largely
absent, the research finds. More than half of people with such plans
(58%) say their savings are included in their backup plans. People
overlook the benefits of insurance products as more cost-effective means
of protecting their health and income, the report suggests.

Individuals
need help and advice when it comes to planning for retirement and,
among other options, many turn to friends and family who may not be the
most expert source of information.

In addition, the survey
findings reveal a widespread reliance on savings accounts as a possible
route to retirement income. With interest rates expected to remain low
in many countries, there is a need to guide people toward better asset
allocation decisions both in saving for retirement and the decumulation
phase.